Forget those wimps who talk about the week that WAS. Given our nearly divine prescience here at KPC, we can review the week in advance. Here's what to watch for:

1. The election in New Jersey: Chris Christie loses, in a close race, to the most corrupt incumbent governor in the U.S., Jon Corzine. And the reason that Christie will lose is widespread vote fraud. As the Democrats all know, "In counting, there is strength."

2. The election in Virginia: McDonnell beats Deeds. As Rasmussen puts it,Republican Robert F. McDonnell opened a 13-point lead over Democrat R. Creigh Deeds this week – in a survey taken the evening after the president made a campaign appearance for Deeds in the state. I assume that AFTER the visit by BHO, Deeds spoke even louder, and led by 15%.

3. The announcement by President "Fullness of Time" Obama, who is cravenly waiting until Wednesday to announce that he is, in fact, going to send 20,000 troops to Afghanistan. These troops will be fewer than needed, if you believe we can win. And they will be far more than we should send if you believe (as I do) we can't win. And he is waiting until Wednesday to announce so that he can avoid making the left mad for sending so MANY troops, and the right mad for sending so FEW. And waiting until after the elections (#1 and #2, above) to make the announcement is pretty transparent. Sure, the Repubs would do it, also, but....)

4. Nancy Pelosi kills and eats Jim Matheson (D-Utah), a "blue dog" Democrat who was waffling on voting "yes" in the secret "caucus of death" meetings held by party leaders. Says Pelosi, "The important thing is that we get a health care bill passed. If we have to lose 20 seats to do it, it will still be worth it. And besides, moderates make for excellent sashimi plates." Interestingly, it turns out that after eating a moderate, Pelosi's testosterone level was very high, according to Duke University researchers.

You'll thank me. And remember, you heard it first on KPC, your source for fabricated news stories.

Thursday, October 29, 2009

Is the only valid opinion one that comes from personal experience? Do study and research and human capital mean nothing unless one has personally experienced the phenomenon? I ask because of the following, which appeared on a blog called Econospeak:

Some Questions on Unemployment for Economists

by Tom Walker

1. Over the last decade, in how many months have you a) had no income from employment? and b) were unsure how long it would be before you would again receive a paycheck?

2. How many times in your working life have you had to "change careers" because there were meager prospects in the field of work you had become proficient at?

3. How likely do you believe it is that you will be laid off as a professor in a) the next six months? b) the next year? c) the next five years?

4. How many of your fellow tenured economics professors do you know of who are currently laid off from their positions?

5. What do you think of the Pope's views on birth control?

EconoSpeak readers, please contribute your suggestions to this list of questions for economists on unemployment.

Here are my answers: (1) none, (2) never, (3) a: 0%, b: 10%, c: 20%, (4) If furloughs count as layoffs, hundreds, otherwise very few. (5) I disagree with the Pope's views on birth control, but NOT BECAUSE HE ALLEGEDLY IS CELIBATE!!!!!

If we extend this "logic":

Only the uninsured should have a voice in the health care debate.

Only soldiers should make our military decisions.

I can't tell if the post is supposed to be funny or if the guy thinks he is making some kind of point.

It ALSO turns out that that number is almost totally fake, in the sense that it does not reflect real growth. Much of it is the "my cash for your clunker" program. Cash for Clunkers was a pretty dumb program; Edmunds estimated that the program cost taxpayers $24,000 for every car sold, over and above the cars that would have been sold anyway. (Here are the Edmunds numbers....)

GDP is C + I + G. Spelled out, that means that Gross (total, before exports) Domestic (what we do in the US) Product (aggregate economic activity)

equals the sum of: Consumption by consumers (C)plusInvestment by business (I)plusSpending by government (G)

So, the total went up by 3.5%, and that seems like growth.

But all the increase is in G, financed by the increased deficit. It's fake. It's not real growth. It's just shifting money from taxpayers tomorrow into Obama's approval rating today.

Seriously, all we did was blow up G like a giant helium flying saucer, with no balloon boy in it. The 3.5% "growth" is fake. It's all G. Ask yourself: why is this a "jobless recovery?" Why aren't consumers going back to the stores, if this is a real recovery? Answer: it is NOT a real recovery.

Check this quote from Christina Romer:“Data released today by the Commerce Department show that real GDP grew at an annual rate of 3.5 percent in the third quarter of the year. This is in stark contrast to the decline of 6.4 percent annual rate just two quarters ago. Indeed, the two-quarter swing in the rate of growth of 9.9 percentage points was the largest since 1980. Analysis by both the Council of Economic Advisers and a wide range of private and public-sector forecasters indicates that the American Recovery and Reinvestment Act of 2009 contributed between 3 and 4 percentage points to real GDP growth in the third quarter. This suggests that in the absence of the Recovery Act, real GDP would have risen little, if at all, this past quarter.”

Right. Without the increase in G, there would be no increase. BUT EVERY DOLLAR WE SPEND ON G IS BORROWED FROM OUR CHILDREN!!!! Keynes said that we should pay people to go out and bury jars full of money, so that other people would have "jobs" digging up the jars. No. No, no, no.

UPDATE/EXPANSION:

Simple answer: this is the Keynesian fallacy.

If I buy a refrigerator, that is a real transaction. And it counts toward C (consumption)

If I own a business, and I buy a new machine tool, or fork lift, that is real, also. It counts toward I (investment).

Real recoveries are led by C + I

The Keynesian fallacy, based on the "multiplier" theory, is that government spending causes growth. And it COULD, if the money is spent on infrastructure, keeping us safe, etc. But then the growth that it causes come from the consequent, LATER increases in C and I. (And, the multiplier is NOT 4; it's more like 0.8 to 1.1, at best. It may be negative!)

THIS growth, this GDP number today, is just an accounting trick: Suppose I borrowed $10,000 on my credit card, and then told my wife, "Look, here's the $10,000, our income has gone up by $10,000!" Then I go out and spend the "income" on a new bass fishing boat.

She would hit me with a chair! Borrowing money and spending it is NOT increased income.

Well, the income of the nation is GDP. But we are borrowing money (the deficit) to finance increased spending in G (government).

So, an accountant might say that C + I + G is going up. But if the increase is all G, and it's borrowed, then that is not real growth.

In a new NBER working paper (ungated version here) Alfaro and Chari ask the question, "India Transformed?" and their answer goes something like this:

Using firm-level data this paper analyzes the transformation of India’s economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms in manufacturing and services industries. Detailed balance sheet and ownership information permit an investigation of a range of variables. We analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, number, and size of firms evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.

I think this post's title is a pithier abstract, but then I don't work at the Harvard B-School, do I?

I like very much the original intent of the enterprise we now call DSGE modelling. Build a model from first principles wherein we can identify the deep parameters and do real policy analysis.

Two things though have always bothered me in the actual practice of DSGE modelling.

The first is the use of the "Calvo rule" for modelling how firms change their prices. This method assumes that firms have a constant probability of changing their price and that said probability does not vary with how long it has been since they last changed their price (i.e. it has a constant hazard).

The second is the increasing number of ad-hoc "real rigidities" that are routinely added to the models to help them fit the data. Things like adjustment costs for capital, labor, and leisure, among others. They are not derived from theory, their correct functional forms are far from obvious, and in my view, they make the claim that we can do real counterfactual policy analysis with the models fairly suspect.

I have been told by practitioners that the Calvo rule is innocuous. They say that is a literally false assumption that is convenient, yet does not play a major role in the models' dynamics.

Two new papers show that, at least in some cases, this is not correct. In "The cost of tractability and the Calvo pricing assumption" (available here), Fang Yao shows that, in the model he studies, replacing the Calvo rule with a price adjustment rule where the hazard function is increasing, makes the inflation dynamics of the model fit the data better without incorporating real rigidities! He also shows that money shocks have a bigger impact with the increasing hazard price adjustment rule.

In other words, in his model, the Calvo rule is not innocuous and replacing it with a more realistic rule lessens the need for incorporating real rigidities into the model and changes conclusion about the importance of nominal shocks for explaining model dynamics. Two birds with one stone!

Another recent paper, "Heterogeneous price setting behavior and aggregate dynamics" (available here) by Carvalho and Schwartzman not only allows for non-constant hazards but allows more than one type of price adjustment rule to be followed in the economy. They find that allowing such heterogeneity in price adjustments has large effects on model dynamics, specifically that it creates larger amounts of monetary non-neutrality.

Yes, Elmer Zen Million passed away last weekend at the age of 68. In the last Mayoral race here, he ran against a political science professor and a real estate developer. In other words, despite his reputation for goofiness, he was the most qualified and best candidate (by the way, the professor won).

One EZ Million fact that I didn't know until his obituary is that he had a great uncle named Tennyson Million who went by Ten Million and signed his name as 10,000,000!

How can China's exchange rate peg be "currency manipulation"? Of course literally it is, as is any peg, because you have to undertake policies to keep your currency at the target value. People, this is exactly how the Bretton Woods system worked for the entire Western world and it is how the Gold Standard worked as well.

Is that what we want to mean by "manipulation"?

China is not out there devaluing their currency. They are just pegged to us and we do the devaluing for them (with respect to the rest of the world).

Many US economists are pleased that we have a lower dollar to promote exports. Why is that not OK for China too? Yes I understand that we are a deficit country and China is surplus country, but I would be way more concerned about getting China to open its markets to a much greater extent than I would be about the nominal exchange rate between the US and China.

As alluded to above, the Chinese peg fixes the nominal exchange rate, but the key price for trade is the real exchange rate, which is not under Chinese control.

I have not seen any analyses of the bilateral RER between China and the US, but I think Chinese inflation is higher than US inflation so that under the recent peg, there have been RER movements actually making the Chinese currency less competitive.

All this fussin' and feudin' isn't good for the international trading system. We slap anti-dumping on Chinese tires, they react against US nylon, other countries take note and get into the act (I think India has like 30 anti-dumping cases against China), and the whole system suffers.

The Chinese peg to the dollar is not cause of all our problems, nor is the floating Yuan the solution to our problems.

Monday, October 26, 2009

The title of this post is what Antoine Walker (forever known around chez Angus as "big head") answered when a reporter asked him why he took so many three point shots.

As the NBA season starts up, Antoine has no team, no contract and is barely staying out of jail for unpaid debts. Despite earning $110 million dollars in his career and only being 33 years old, 'Toine is busted and the bills are coming due:

And he faces a host of other claims. This summer J.P. Morgan Chase Bank, Wachovia Bank, and American Express Centurion Bank won decisions against Walker. He was ordered to pay J.P. Morgan Chase $1,571,771.47 and Wachovia $1,540,929.14 - both for failing to pay off sizeable promissory notes. From court documents, the loans appear originally related to Walker’s nonbasketball business endeavors.

A default was entered in the American Express case with $53,321.71 in overdue credit card charges at stake, including some that fit the picture of a free-spending star - an $1,843.45 dinner, with a $350 tip, for instance. Or, two nights at the Mandarin Oriental in Miami for $2,198.04. And Walker, remarkably, appears to have authorized five people to make charges on his card, not a strategy most personal finance professionals would recommend. Many of the charges appear to have been rung up by another individual, but Walker is on the hook.

Additionally, in March, an arbitrator ruled that Walker owed his former agent, Mark Bartelstein, more than $450,000 in unpaid fees. Bartelstein declined to comment about the matter.

Antoine liked to live large:

Walker turned the pavement surrounding his home into a virtual luxury car lot - two Bentleys, two Mercedes, a Range Rover, a Cadillac Escalade, a bright red Hummer. Often, the vehicles were tricked out with custom paint jobs, rims, and sound systems at considerable added expense. He also collected top-line watches - Rolexes and diamond-encrusted Cartiers.

One person who doesn't think Walker has a problem? His Moms:

“Antoine doesn’t owe anybody any explanation,’’ said Diane Walker. “He’s not out here hurting anybody. He’s trying to live his life peacefully. That’s all he’s doing . . . My son is young. Why can’t he just enjoy life, go where he wants to go?’’

“Antoine is doing great,’’ said Diane. “I have my home. He has his home. If he’s doing so bad, then how could we still be here?’’

We at KPC sincerely hope it doesn't come to that, but it's looking like it well might.

"It was a purposeful confusion on the part of the German metaphysicians of statolatry that they clothe all men in the government service with the gloriole of such altruistic self-sacrifice. From the writings of German etatists the civil servant emerges as a saintly being, a sort of monk who forsook all earthly pleasure and all personal happiness in order to serve, to the best of his abilities, God's lieutenant, once the Hohenzollern king and today the Fuehrer. The Staatsbeamte does not work for pay because no salary however large could be considered an adequate reward for the invaluable and priceless benefits that society derives from his self-denying sacrifice. Society owes him no pay but a maintenance adequate to his rank in the official hierarchy. It is a misnomer to call this maintenance a salary" (Ludwig von Mises, 1944, OMNIPOTENT GOVERNMENT)

Der Geist points out that I am an ignoramus for not knowing that "statolatry" is a word. I am afraid Der Geist is correct.

On Monday, October 26th, Bob Orr and Jeanette Doran will present oral arguments before the N.C. Court of Appeals about whether Plaintiffs have standing to challenge, under the Uniformity Clause of the N.C. State Constitution, a special tax break given to Google.

Wow. Lots of traveling. Drove up to Alexandria, VA for a IHS/Lib Fund conference last Friday, did the discussion leader thing for 48 hours. Great kids, great conference on trade policy. Had a very nice dinner Saturday night at Laporta's, near the hotel. Spent much of dinner reminiscing about that idiot Fred Jameson accepting that hoax paper Sokal wrote about "Quantum Gravity" (one of the other people at my table knew a lot about it, and had us in stitches). It is worth remembering, and laughing about. Here is Sokal's LINGUA FRANCA article. Hee.

Then drove to Newport News, VA to give a talk at the business school. Pretty tired. Nice sunset, out of my hotel window though. Nice hotel, too.

Sunday, October 25, 2009

A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes. Germany could raise 100bn euros (£91bn) if the richest people paid a 5% wealth tax for two years, they say.

Then however, we get to the pithy essence: not too bloody many rich Germans are demanding higher taxes!

The petition has 44 signatories so far, and will be presented to newly re-elected Chancellor Angela Merkel.

Signatory Peter Vollmer told AFP news agency he was supporting the proposal because he had inherited "a lot of money I do not need".

He said the tax would be "a viable and socially acceptable way out of the flagrant budget crisis".

The group held a demonstration in Berlin on Wednesday to draw attention to their plans, throwing fake banknotes into the air.

Mr Vollmer said it was "really strange that so few people came".

As my good friend Mark Perry is fond of pointing out, you can always voluntarily pay more taxes. Mr. Vollmer and his 43 BFFs could simply hand over their dough to Angela and be done with it.

What's that you say? maybe 44 isn't such a small number?

Ummmm...

The man behind the petition, Dieter Lehmkuhl, told Berlin's Tagesspiegel that there were 2.2 million people in Germany with a fortune of more than 500,000 euros.

so a more accurate headline would actually have been:

"0.002 percent of rich Germans demand higher taxes on themselves".

Time to have Roseanne Rosannadanna make a guest appearance on the BBC, no?

It's pretty amazing that Dinosaur Jr. and Built to Spill have good new albums out. Despite the fancy name, the place is a low -roofed country sh*&$- kicker bar, but Mrs. A and I will be there for the duration.